KLA-Tencor (KLAC) Down 2.3% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for KLA-Tencor Corporation (NASDAQ:KLAC) . Shares have lost about 2.3% in that time frame, outperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is KLAC due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

KLA-Tencor Beats Earnings and Revenue Estimates in Q2

KLA-Tencor reported second-quarter fiscal 2018 earnings of $1.97 per share, beating the Zacks Consensus Estimate by 25 cents. The figure surged 30% from the year-ago quarter and 10% sequentially.

Revenues increased 11.3% from the year-ago quarter to $975.8 million, comfortably surpassing the Zacks Consensus Estimate of $964 million. The figure was within management’s guidance of $930-$990 million.

Products revenues (almost 78% of total revenues) increased 11.4% year over year to $761.6 million. The figure was better than the consensus estimate of $759 million.

Services revenues (22% of total revenues) increased 10.9% from the year-ago quarter to$214.2 million, which was also better than the consensus estimate of $208 million.

Shipments Details

Shipments in the second quarter were $1.041 billion, up 7% sequentially and above the guidance of $945 million to $1.025 billion.

Memory accounted for 71% (in line with guidance) of second quarter shipments, 20% of foundry customers and 9% of logic.

In terms of end market, Wafer Inspection, Patterning (includes shipments from reticle inspection business), Service and Non semi (includes back-end component inspection business) contributed 47%, 30%, 21% and 2% of shipments, respectively.

KLA continues to experience strong growth for its Wafer Inspection solutions. Management stated that new capacity addition by Wafer manufacturers and adoption of more complex architectures by IC customers are driving demand for new bare wafer products. These are needed to support more stringent wafer flatness and process tool cleanliness specifications in advanced technologies.

Moreover, Gen 5 broadband plasma wafer inspection platform continues to gain momentum in the marketplace. Management expects the solution to continue to support customers in development of 7-nanometer (nm) technology. It is also expected to have a larger role on the development and ramp of the 5-nm, node.

The company witnessed strong growth in China. Management said that China was strong in terms of both process control adoption and market share gains.

Also, orders from native Chinese customers nearly tripled in 2017 and this strong momentum is expected to continue in 2018.

Operating Details

KLA’s gross margin expanded 70 basis points (bps) on a year-over-year basis to 64.6% and came in above the guided range of 63-64%. The year-over-year growth was driven by favorable product mix.

Operating expenses, as percentage of revenues, increased 50 bps from the year-ago quarter to 26.9%.

As a result, operating margin expanded 60 bps to 35.6%.

Balance Sheet

KLA ended the quarter with cash, cash equivalents and marketable securities balance of $2.76 billion compared with $3.06 billion in the previous quarter. Cash from operations was $129.4 million in the quarter and free cash flow was $116 million.

Guidance

For third-quarter fiscal 2018, KLA expects shipments of $945 million to $1.025 billion. Revenues are expected between $970 million and $1.03 billion.

Management expects foundry orders to be approximately 15% of shipments in the third quarter. Memory shipments are anticipated to be 70%, while Logic is currently projected to be 15% of the shipment.

KLA expects gross margin in the range of 63.5% and 64.5%. Operating expenses are expected to be $255 million.

Non-GAAP diluted EPS is expected in the range of $1.85 to $2.09, while GAAP diluted EPS of $1.84 to $2.08.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been three moves higher compared to one lower in the last two months. In the past month, the consensus estimate has shifted by 7.3% due to these changes.

KLA-Tencor Corporation Price and Consensus

KLA-Tencor Corporation Price and Consensus | KLA-Tencor Corporation Quote

VGM Scores

At this time, KLAC has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and growth investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of this revision also looks promising. Notably, KLAC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.